Philosophy of Tax: Adam Smith

Pretty much everybody in the U.S. has to pay taxes and pretty much everybody in the U.S. complains about it. Who should we blame?

A guy named Adam Smith.

The whole philosophy of taxes in our country came mostly from Adam Smith, who wrote a book called The Wealth of Nations. Dude died a long time ago, so you can't send him hate mail. But understanding his ideas can help you find out what he was thinking in the first place.

Adam Smith's goal was to create a tax system that had four requirements:

Equality

Certainty

Convenience

Economy

If you've had to file a tax return at some point, you may be falling off your chair laughing at the idea of these four requirements having anything to do with the IRS.

We'll wait till you compose yourself.

Oh, did I say "convenience"? I meant hold times of two hours or more.

Ready?

Equality

Smith thought that taxes should be based on what a taxpayer can afford to pay. So a CEO making $3 million a year and the mom making minimum wage at her coffee shop job won't be paying the same dollar amount.

In order to make things equal, the U.S. government takes a look beyond what you're earning. If you and your neighbor both earn $40,000, for example, but you have two kids, you'll get deductions because you have to pay for the kids—and that means you have less cash to fork over to Uncle Sam.

That's great for you, but your neighbor may complain. He might say that you decided to have kids, and his decision not to have them shouldn't mean that he misses out on a tax break. He'll probably ask why money goes toward people like Kate Gosselin or Octomom, who choose to have big families. At which point you could tell him to get off your lawn and stop watching tabloid TV.

Certainty

Ha.

Smith thought that taxes should be clear, so that everyone paying them could understand when, how, and what they should be paying. The tax code is meant to do that, by outlining the taxes you have to pay and clearly stating that your income tax return is due on April 15. And the tax code (if you bother reading it) lets you see exactly how much you will owe and exactly how much you're going to have to curse once the bill comes due.

Lots of people will point out, though, that the tax code changes all the time and is complicated enough that many Americans just hand their paperwork over to accountants or tax preparers to fill out. If you've ever seen a tax form, "certainty" probably isn't the first word that comes to mind.

Convenience

Oh, Adam. What a joker.

Smith thought that taxes should be payable when it was convenient for the taxpayer. Your income tax usually comes out of your paycheck, which means you're paying after you've been paid and not before. You're also charged sales tax when you by something, so you don't have to keep track of all your purchases and 'fess up that you bought that extra package of beef jerky three months ago (secret's safe with us).

Of course, when you're standing in line to talk to a tax preparer or wondering how to fill out line 32 on form IRS-MISC-WHY, it might not seem so convenient. And when you can't pay for an extra dinner out with friends because of the money Uncle Sam's taking, it might not seem very fair at all.

But for the government, convenience is relevant.

Economy

According to Smith, most of the taxes that are collected should go to the U.S. treasury and not toward compliance and administration. Currently, the IRS has a budget that is about 0.5% of the year's taxes. Of course, taxes would be even more affordable to administer if they weren't collected at all, but our state governor isn't answering our calls about that.

So those are the principles on which the tax system is based. But, uh, they're more goals than reality. Part of the problem is that everyone has a different idea of what is fair, affordable, understandable, and convenient.